I am in the process of getting my masters degree in taxation. My professors give tests that not only question our ability to use practical application for hypothetical tax situations, but also charge us to be able to cite court rulings to back up our decisions. My tax practice is in the state of Oregon, which has one of the highest tax licensing standards in the United States. Thus, I found the following information helpful to understand today’s ruling.
In a 6-3 decision, the Supreme Court handed a major victory to the Obama Administration and the Affordable Care Act. At issue were the Premium Assistance Tax Credits given to qualifying individuals who purchased their health insurance through Federal exchanges in the 36 states without state exchanges.
The plaintiffs in Burwell argued for a plain reading of IRC Section 36B(a); Congress intended that the premium tax credits would only be available on insurance purchased through “an exchange established by a state.” In urging the Court to adopt a literal meaning of this phrase, the plaintiffs said that Congress intended the tax credits as an incentive for states to establish exchanges that would be just too good to pass up; like the iconic movie mobster says, “we’ll make’em an offer they can’t refuse.” Unfortunately, 36 states refused this Congressional offer, and the Federal government was forced to step in and establish Federal exchanges in those states to allow the system to function as intended.
The plaintiffs in Burwell, residents of Virginia, were hoping that a literal reading of “an exchange established by a state” would make them ineligible for the Federal tax credit. Strange as that sounds, there was method to reasoning. Not having credits would make their insurance unaffordable, allowing them to opt out of the individual mandate.
In a well-crafted majority opinion, Chief Justice John Roberts stated that the meaning of the phrase “an exchange established by a state” is clearly ambiguous, and it is the job of the Court is such instances to look at the overall Congressional intent of the law in interpreting any particular phrase. What then, did Congress intend?
The ACA was modeled after the experiences of several states, in particular, Massachusetts. The cornerstones of many of the reforms during the last three decades were “guaranteed issue” and the “community rating” requirements; people could not be denied health insurance because of the state of their health and pre-existing conditions. Their premium cost would be largely based on “community ratings,” i.e. the entire insurance pool in their area.
Initially, these reforms worked well, but as time passed, people waited until they became sick before purchasing insurance, and this, combined with a significant lack of young, healthy individuals participating in the health insurance market drove premiums to the point where they were unaffordable to the average person.
To help alleviate this problem, in 2006, Massachusetts passed laws requiring all individuals to purchase health insurance and provided tax credits and penalties as carrots and sticks. The system worked well and insurance costs dropped significantly to the point that now only 2 to 3% of individuals in Massachusetts are currently without health coverage.
The ACA is modeled after these three cornerstones of Massachusetts’s health reform, “guaranteed issue,” “community rating,” and mandatory participation including penalties and incentives to participate. The whole success of the ACA is founded on these three linchpins. If any one of these fails, the whole systems falls into a “death spiral” where premiums skyrocket and people are left without adequate coverage. Recognizing that this “death spiral” would result from removing the federal tax credits in certain states, Justice Roberts wisely deduced the overall Congressional intent in the passage of the ACA:
“A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme…because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law…Here, the statutory scheme compels us to reject petitioners interpretation because it would destabilize the Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid…We cannot interpret federal statutes to negate their own stated purposes.”
by Marcello Innocenti, Enrolled Agent